In previous posts I have covered the lessons for risk management from a number of enforcement cases from the UK Financial Conduct Authority (FCA) (e.g. here and here).
An alternative approach is to capture summary data about all
fines and assess their evolution over time.
This is what NERA – National Economics Research Associates – have been
doing for a number of years. The latest
paper of this series is available here. (Full disclosure: I worked at NERA several years
ago.)
The latest report from NERA evidences the overall increase
in FCA (and FSA) enforcement in the last two years. Total fines to firms have increased from £59
million in 2011-12 to about £420 million in each of the last two full financial
years. The typical fine is also getting
larger with the median fine increase from £1.4 million in 2011-12 to £5.6 million
in 2013-14.
There were also some other interesting
observations:
- The overall number of cases against firms does not necessarily predict the total fines.
- While five out of the 10 top fines against firms relate to LIBOR market manipulation, the others cover “classical” issues such as client assets, unsuitable investments and mis-selling.
- The total of fines against individuals (as opposed to firms) has diminished from £19.9 million in 2011-12 to £3.9 million in 2013-14. A similar trend is observed for number of cases pursued against individuals.
1. The
impact of the FCA revised penalty framework
The increase in FCA fines against firms may be influenced
by the reliance on the revised penalty framework. It is summarised in five steps:
- Step 1: removal of any financial benefit derived directly from the breach
- Step 2: the seriousness of the breach
- Step 3: mitigating and aggravating factors
- Step 4: an increase to the result from the above steps to reflect an adjustment for deterrence
- Step 5: settlement discount
2. The
decline in enforcement cases against individuals
NERA also wonders if this decline is consistent with the
regulatory ambition of using enforcement to provide a “credible
deterrent”.
One possible reason for the decline in enforcement against
individuals is the targeted diversion of resources to other investigations such
as LIBOR and currency manipulation. In this
case, the decline would be reversed in the not-so-distant future.
An alternative is to consider whether the change reflects the
view that enforcement against firms provides a more efficient “credible deterrent”. If this were the case, then the decline of
enforcement action against individuals would not be reversed. I have not come across evidence to support
this claim but here are two arguments to consider:
- A stronger deterrent effect is provided by the overall size of the fines, which tend to be larger for firms, than personal accountability.
- Enforcement cases related to individuals tend to reveal individuals’ determination to breach the rules rather than weaknesses in risk management. There may be a more limited scope for improvement in risk management while providing an effective service to customers.
I would be interested in your thoughts about the likely
impact of the FCA revised penalty framework and the decline in enforcement cases
against individuals.
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